One of the biggest policy developments in the city gas distribution (CGD) sector has been the revision of the bidding criteria for setting up CGD networks. The changed regulations announced by the Petroleum and Natural Gas Regulatory Board (PNGRB) in January 2018, for granting authorisations for setting up a CGD network and natural gas stations have helped attract more investor interest in the ninth bidding round. The amended regulation has addressed most of the concerns of the sector. The need for changes in the existing regulation emanated from the ineffectiveness of the erstwhile bidding criteria.
Amendments to the bidding criteria
The bidding criteria have been revised such that 80 per cent weightage, as compared to 0 per cent earlier, is assigned to infrastructure creation so that gas network penetration is maximised. Participation of more players is incentivised with the extension of the marketing exclusivity period for authorised entities to eight years (extendable up to 10 years) as compared to five years earlier. The new regulation also provides for adequate checks by way of prescribed minimum work programme (MWP) targets for each year for all three measurable segments – steel pipeline length, compressed natural gas (CNG) stations and domestic connections.
In case of underachievement, there are penalties for each year. A year-by-year penalty will be levied if the proposed piped natural gas (PNG) connections and CNG stations are not developed. Also, if the industry bids too low or too high, when it comes to providing PNG connections or constructing CNG stations, then such bids can be rejected by the PNGRB. Further, the new regulation provides for adequate predefined penalties to be imposed on the authorised entities in case of interruption in gas supply to consumers and adherence to other service quality standards. In addition, the provision of complete exit after five years is favourable for the bidders as it reduces long-term business risks.
In the new guidelines, maximum weightage of 50 per cent has been given to the number of piped gas connections proposed in eight years from the date of authorisation as compared to 30 per cent earlier. The number of CNG dispensing stations proposed to be set up has been assigned 20 per cent weightage. The length of pipeline to be laid in the geographical area (GA) and the tariff proposed for city gas and CNG have been assigned 10 per cent weightage each. Also, a floor tariff of Rs 30 for city gas and Rs 2 per kg for CNG has been put in order to deter bidders from quoting unviable tariffs of 1 paise per unit.
The performance bank guarantee (PBG) has been capped at Rs 500 million and linked to the population of GAs. The requirement of an additional bid bond (ABB) has been discontinued. E-bidding has been introduced. Time for financial closure and gas tie-up has been increased to 270 days from the earlier 180 days. Bidding parameters have been rationalised with focus on end results.
Thus, the regulation not only allows for a higher incentive, but also provides clearly for penalties if adequate efforts to meet the commitments are not made by the bid winners, which is a positive for the development of the CGD sector over the long term.
Irrational bidding in the past
In Rounds 4 to 8, a trend of aggressive bidding emerged. Players were seen resorting to bidding strategies of quoting near-zero bids for network tariff and compression charges, in order to win the GAs. The current bidding criteria have resulted in companies bidding for a minimum tariff of 1 paise per mmBtu for network tariff as well as compression tariff. However, these bids cannot be categorised as unethical, as such a strategy was well within the limits of the regulatory criteria. The main objective of aggressive bidding was to obtain GAs, with very little focus on the developmental aspects.
In such a case, the company giving the highest performance bond emerges as the winner. This has resulted in companies with larger balance sheets winning better GAs. For example, for Bengaluru, the winner, GAIL, submitted a performance bond of Rs 52 billion, which is difficult to match by smaller players. As a result of such restrictive practices, only 13 GAs have been awarded to private players including those in joint ventures (JVs) with public sector undertakings. It is widely understood that some players deliberately suppressed key input costs like steel to keep their overall capital costs competitive. These trends pushed the smallest and medium gas players out of the market.
The new bidding criteria will ensure that the focus is on expanding the PNG pipeline and the CNG network. Transportation floor rates will prevent unreasonable bidding of low rates. WPI linking of the transportation rates reduces the complexity of the bid. The high weightage (50 per cent) for PNG connections, reflecting the thrust of the government on this segment, will lead to significant widening of the domestic PNG network. However, as the volumes from the domestic PNG segment per inch-km of pipeline laid remain lower than those for CNG or PNG (industrial/ commercial), the profitability of new entrants will have to be largely supported by marketing margins from other segments.